EEOC Permits Coordination of Retiree Health Benefits with Medicare

In late December, the Equal Employment Opportunity Commission (“EEOC”) issued a final regulation allowing employers to coordinate retiree health benefits with Medicare (or comparable state health benefits), without violating the Age Discrimination in Employment Act of 1967 (“ADEA”).

The EEOC’s publication of the final rule is the latest act in a saga that began back in 2000. At the time, it was common practice for employers to coordinate retiree health benefits with Medicare in order to control medical costs and avoid redundancy of benefits. However, the practice was questioned by the Third Circuit Court of Appeals in Erie County Retirees Association v. County of Erie. In Erie, the county offered a retiree medical plan with different coverage for pre- and post-Medicare eligible retirees. Although both groups received the same coverage, the county paid less for the older retirees’ benefits because they were also covered by Medicare. The Erie ruling in 2000 required that health insurance benefits received by Medicare-eligible retirees be the same, or cost the same, as the health insurance benefits received by younger retirees.

The EEOC initially adopted the Third Circuit’s interpretation as its national enforcement policy. Fearing that this policy was contributing to a decline in the availability of employer-sponsored retiree health benefits, the EEOC reversed itself in 2003. In July of 2003, the EEOC proposed a narrow ADEA exemption that would allow employers to coordinate retiree health benefits with Medicare or similar state programs. The AARP sued to block adoption of the exemption, arguing that it amounted to age discrimination because it would allow employers to reduce benefits of older retirees. Pending resolution of the AARP litigation, a district court injunction prohibited the EEOC from adopting the exemption as a final rule. Last summer, the Third Circuit Court of Appeals sided with the EEOC, lifting the injunction. However, the AARP has sought review from the Supreme Court. Until the Court denies certiorari or otherwise rules on the Third Circuit decision, this story will remain unfinished.

Although things may change again based on the Supreme Court’s disposition of the case, the EEOC’s publication of the final regulation should make employers more comfortable with coordinating retiree health benefits and Medicare. The new ADEA exemption allows employers to design their benefit plans so that health care benefits for retired participants are altered, reduced or eliminated when the retirees become eligible for Medicare or a similar state sponsored program. Reductions can also be made to spousal and dependant coverage included in the retiree plan.

The ADEA exemption applies only with respect to retirees and only with respect to health benefits. For example, the new exemption would not allow an employer to stop providing health benefits to active employees when they become eligible for Medicare. Also, health plans remain subject to Medicare Secondary Payer rules.